In re Mersmann

• Decision Date: 24 September 2007
• Docket Number: No. 05-3024.,No. 05-3013.,05-3013.,05-3024.
• Parties: In re Patti Jan MERSMANN, Debtor, Educational Credit Management Corporation, Appellant, v. Patti Jan Mersmann, Appellee, United Student Aid Funds, Inc., and United States of America, Amici Curiae. In re Connie Ann Seiwert, Debtor, Connie Ann Seiwert, Appellant, v. Educational Credit Management Corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

505 F.3d 1033

In re Patti Jan MERSMANN, Debtor,

Educational Credit Management Corporation, Appellant, v. Patti Jan Mersmann, Appellee, United Student Aid Funds, Inc., and United States of America, Amici Curiae.

In re Connie Ann Seiwert, Debtor,

Connie Ann Seiwert, Appellant, v. Educational Credit Management Corporation, Appellee.

No. 05-3013.

No. 05-3024^*.

United States Court of Appeals, Tenth Circuit.

September 24, 2007.

Daniel Fisher, Educational Credit Management Corporation, St. Paul, Minnesota (Scott M. Browning and Craig R. Welling, Rothgerber Johnson & Lyons LLP, Denver, CO, with him on the briefs) for Appellant in 05-3013.

John R. Hooge, Attorney at Law, Lawrence, KS, for Appellee in 05-3013.

Peter R. Maier, Appellate Staff (Leonard Schaitman Appellate Staff, and Peter D. Keisler, Assistant Attorney General, with him on the brief) Civil Division, Department of Justice, Washington, D.C., for Amicus Curiae United States in 05-3013.

Mac D. Finlayson, Morrel, West, Saffa, Craige & Hicks, Inc., Tulsa, OK, on the

brief for Amicus Curiae United Student Aid Funds, Inc. in 05-3013.

Lynn D. Lauver, Attorney at Law, Topeka, KS, on the brief for Appellant in 05-3024.

Daniel Fisher, Educational Credit Management Corporation, St. Paul, Minnesota, Scott M. Browning and Craig R. Welling, Rothgerber Johnson & Lyons LLP, Denver, CO, on the brief for Appellee in 05-3024.

Before TACHA, Chief Judge, SEYMOUR, KELLY, HENRY, BRISCOE, LUCERO, MURPHY, HARTZ, O'BRIEN, McCONNELL, TYMKOVICH, and HOLMES, Circuit Judges.

TYMKOVICH, Circuit Judge.

I. Introduction

These appeals ask us to reconsider our Circuit's precedent concerning the discharge in bankruptcy of student loan debts. Under the Bankruptcy Code, student loans are non-dischargeable unless the student-debtor proves that continued payment is an "undue hardship." 11 U.S.C. § 523(a)(8). Since 1999, we have allowed students to establish undue hardship simply by submitting language in a proposed Chapter 13 plan, which, if unobjected to by a creditor and approved by the court, is later uncontestable. Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir.1999). This practice is known as "discharge-by-declaration" because the debtor is not required to prove undue hardship in an adversary proceeding as required by Federal Rule of Bankruptcy Procedure 7001(6).

Since our holding in Andersen, only one other circuit has followed our lead. See Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. 1999). And, a panel of this Court in 2004 retreated from a broad reading of Andersen in a case limiting discharge-by-declaration to cases involving explicit hardship language in the confirmation plan. Poland v. Educ. Credit Mgmt. Corp. (In re Poland), 382 F.3d 1185 (10th Cir.2004). In Poland, the panel concluded that, while binding precedent, Andersen was "wrongly decided and should be reconsidered." Id. at 1189 n. 2. We accept that invitation today.

Here, Educational Credit Management Corporation, along with the United States Government as a friend-of-the-court, argues that discharge-by-declaration violates due process and should not be entitled to the benefit of res judicata. Debtors Patti Jan Mersmann and Connie Ann Seiwert ask us to reaffirm Andersen. A panel of this Court considered the arguments in these two cases on January 16, 2007. After reviewing the merits, the panel recommended that the Court revisit its holding in Andersen. Accordingly, the panel sua sponte called for a poll of the full court to consolidate these two cases and to consider the cases en banc. The participating members of this Court unanimously voted to consolidate these cases and grant an initial en banc review.

Because we find that the discharge of student loans without an adversary proceeding violates the Bankruptcy Code and Rules and is not entitled to res judicata effect, we now overrule Andersen. We also apply our decision prospectively only, so today's holding has no effect on these consolidated appeals. We therefore AFFIRM the Bankruptcy Appellate Panel's orders in Mersmann and Seiwert.

II. Background

These two appeals have slightly different factual and procedural backgrounds.

A. Mersmann

Patti Jan Mersmann, a resident of Kansas, obtained a student loan initially issued by Union Financial Services-1, Inc. c/o UNIPAC Service Corporation and Norwest Bank. On July 15, 1998, Mersmann filed a voluntary petition for bankruptcy under Chapter 13. Union Financial filed a proof of claim on August 3, 1998 and then transferred the loan to a guaranty agency, National Student Loan Program (NSLP), on October 5, 1998. NSLP then provided notice of the assignment of the loan to Educational Credit Management Corporation (ECMC) on January 16, 2001.¹ ECMC is a private, non-profit guaranty agency under the Higher Education Act, 20 U.S.C. § 1071, which guarantees private lender loans to student borrowers who attend eligible institutions of higher education. ECMC, thus, provides guarantor services for student loans against default and, in turn, is reinsured by the United States Department of Education. See 20 U.S.C. §§ 1085(j) and 1078(c).

Mersmann submitted a confirmation plan that called for a partial repayment of the student loan and a discharge of the debt at the end of the plan with her petition. The plan specifically stated, "Note — 10% of all general, unsecured creditors are to be paid through plan. Upon completion of plan and payment of said 10% of general, unsecured creditors, all remaining unsecured debts, including school loans that are non-dischargeable in chapter 7 cases, shall be discharged." Mersmann Aplt. App. Vol. I at 49. At the time, Mersmann maintained a balance of $12,569 on her student loan. ECMC received notice of the plan, but did not lodge any objection. The bankruptcy court issued an order confirming the plan on December 9, 1998.

A few months later, on February 19, 1999, Mersmann sought to amend the plan to include the following language,

(1) School loans that are non-dischargeable in chapter 7 cases — to be treated as general unsecured creditors and as follows: 10% of all allowed general, unsecured creditors are to be paid through plan, after payment of allowed secured creditors. Upon completion of planned payment of said 10% of allowed general, unsecured creditors, all remaining unsecured debts, including school loans that are otherwise non-dischargeable in chapter 7 cases, shall be discharged. Said completion of the plan shall result in a finding that it would be an undue hardship for the Debtor to have to pay any additional monies to the special class of school loans not otherwise dischargeable.

Id. at 58. Such language would constitute a discharge-by-declaration upon confirmation.

Again, ECMC received notice of the amendment, but failed to object. The bankruptcy court granted the amendment on May 25, 1999. Four years later, Mersmann completed the plan and the bankruptcy court discharged Mersmann's existing debts pursuant to the plan on June 2, 2003. Despite the plan's terms, the discharge order specially excepted from discharge "a student loan or educational benefit overpayment as specified in 11 U.S.C. Section 523(a)(8) in any case in which discharge is granted." Id. at 76.

Following her discharge, ECMC attempted to collect the remaining balance on Mersmann's student loan debt. She asserted that her student loan had been discharged through her plan under 11 U.S.C. § 1327. On September 15, 2003, ECMC filed a Rule 60b(4)² and (6)³ of the Federal Rules of Civil Procedure motion to vacate the bankruptcy court's discharge order claiming that it violated due process because the hardship determination was obtained without adequate notice and an adversary proceeding. Mersmann opposed the motion and cross-moved to amend the discharge order under Rule 60(a)⁴ to recognize the discharge of her student loans.

In a single opinion consolidating four similarly-situated debtors, the bankruptcy court found for Mersmann, denied the 60(b) motions, and amended the discharge order to excise the language excluding student loans.⁵ See Educ. Credit Mgmt. Corp. v. Boyer (In re Boyer), 305 B.R. 42, 50 (Bankr.D.Kan.2004). ECMC appealed the decision to the bankruptcy appellate panel (BAP), which affirmed the lower court order. See Educ. Credit Mgmt. Corp. v. Mersmann (In re Mersmann), 318 B.R. 537 (B.A.P. 10th Cir.2004). Both the bankruptcy court and the BAP upheld the discharge based on our holding in Andersen. ECMC appeals these rulings, asking us to reconsider Andersen on due process grounds. The United States has joined ECMC as an amicus based on its position as a direct lender and guarantor of student loans. The United States urges us to overturn Andersen on statutory grounds, without taking a position on the due process issue.

B. Seiwert

Connie A. Seiwert received student loans from the Nebraska Student Loan Program c/o UNIPAC Service Corporation and Windham Professionals (NebSLP). After encountering personal financial difficulties, Seiwert filed for bankruptcy on December 19, 1996. Seiwert's plan included her student loan for the amount of $22,000. NebSLP filed a proof of claim with a principal balance of $26,259, plus interest of $2,769, for a total of $29,028. Seiwert's trustee objected to NebSLP's proof of claim and the bankruptcy court entered an order dividing the claims into (1) a special class of unsecured claim (student loans) for $22,000 and (2) a general unsecured claim for $7,028.

As a part of her Chapter 13 proceedings, Seiwert submitted a confirmation plan to the bankruptcy court that provided,

Student Loan creditors will be paid the remaining unpaid original principal amount [of $22,000]. . . . During the pendency of the Bankruptcy Proceeding, no interest or penalties will accrue on these debts or claims. All such debts other than the remaining unpaid original principal amount of the loans remaining unpaid upon completion of the plan...